LIBRARY 


UNIVERSITY  OF  CALIFORNIA 


GIFT  OF 


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o 


frarttral 


Auditing 


A  WORKING  MANUAL   FOR  AUDITORS 


PRICE,    TWO    DOLLARS 


GEORGE     B.     RENN 

267    Lincoln    Avenue,    CHICAGO,  ILLINOIS 


PRACTICAL 

AUDITING 


A  Working   Manual  for  Auditors 


DESCRIBING    THE     DETAILS     OF    A    COMMERCIAL 
AUDIT,  IN  PROGRESSIVE  STEPS  FROM  THE 
PROPER  POINT  OF  BEGINNING 
THROUGH  TO  COM- 
PLETION, 

WITH 
GENERAL       NOTES       ON       AUDITING 


BY 
GEORGE     B.    RENN 

ACCOUNTANT  AND  AUDITOR 


PRICE,  TWO  DOLLARS 


PUBLISHED  BY 

GEORGE  B.  RENN 

267    Lincoln   Avenue 
CHICAGO,    ILLINOIS 


Jtyl- 

M 


Entered  according  to  act  of  Congress,  «n  the  year  1905, 

By  GEORGE  B.  RENN, 

in  the  office  of  the  librarian  of  Congress,  at  Washington. 
All  rights  reserved. 


CONTENTS 


GENERAL  NOTES 

Miscellaneous  Page     7 

Vouchers  8 

Analysis  of  Accounts  9 

The  Controlling  Account              -  10 


ORDER  OF  PROCEDURE 

The  Cash  Balance  Page  13 

The  Bank  Balance  15 

Trial  Balances  16 

The  Cash  Book  17 

The  Voucher  Register  21 

The  Purchase  Book  22 

The  Sales  Book  "23 

The  Journal "24 


REVIEW  AND  CONCLUSION 

Miscellaneous  Page  27 
The  Profit  and  Loss  Account 

The  Balance  Sheet  29 

The  Auditor's  Report  31 

The  Auditor's  Certificate       •            •            •  •           "      32 


154574 


Preface. 

All  the  literature  on  auditing  published  heretofore  presup- 
poses familiarity  with  the  rules  of  practice  on  the  part  of  the 
student;  hence  the  information  thus  far  obtainable  upon  this 
subject  is  of  too  indefinite  a  character  to  be  understood  easily 
by  that  large  class  of  accountants  who  are  otherwise  excellently 
equipped  for  auditing,  but  who  are  lacking  in  experience. 

The  purpose  of  this  manual  is,  therefore,  to  set  forth 
minutely  the  details  to  be  pursued  in  making  a  commercial  audit, 
and  to  indicate  in  proper  order  the  procedure  to  be  followed. 

With  this  brief  explanation  the  book  is  respectfully  sub- 
mitted to  ambitious  accountants, 


General   Notes. 

For  the  sake  of  brevity  the  two  dates  limiting  the  period 
under  audit  will  be  termed  respectively  the  "initial  date"  and 
the  "terminating  date." 

In  a  suitable  note-book  make  memoranda,  as  you  proceed 
with  the  audit,  of  such  particulars  as  you  will  require  in  making 
up  your  report  after  the  audit  is  completed.  One  of  the  first 
points  to  set  down  is  a  complete  list  of  the  books  in  use,  giving 
their  titles,  and  where  the  titles  do  not  clearly  indicate  it,  their 
purposes  as  wrell,  together  with  the  names  of  the  clerks  who 
are  responsible  for  the  work  contained  in  the  individual  books. 

With  a  rubber  stamp,  bearing  the  \vord  "Audited"  above 
your  name,  stamp  conspicuously  all  loose  papers  of  a  fulfilled 
character  as  you  inspect  them  ;  such  as  returned  bank  checks, 
receipts,  invoices,  paid  notes,  pay-rolls,  and  other  vouchers.  This 
will  forestall  any  possibility  of  the  same  vouchers  being  foisted 
upon  you  a  second  time  in  support  of  disbursements.  As  it 
is  not  permissible  to  stamp  securities  in  this  manner,  it  is  neces- 
sary to  observe  caution  when  inspecting  bills  receivable,  stocks, 
bonds,  mortgages,  and  securities  of  all  kinds,  to  the  end  that 
y<  >u  do  not  list  them  more  than  once. 

Adopt  a  personal  check-mark,  and  check  all  items  and  foot- 

7 


ings    (preferably  with   red  ink)    when  you   take  them   into   ac- 
count during  the  audit. 

If  you  encounter  an  erased  or  doubtful  item  in  any  of  the 
money  columns,  ascertain  what  it  should  be,  and  then  write  the 
correct  amount  above  it  in  red  ink.  This  will  detect  any  erasures 
or  alterations  which  may  be  made  after  you  have  audited  the 
items,  as  such  changed  items  will  not  bear  your  red  ink  iden- 
tification marks  when  you  review  the  books. 

Be  on  the  alert,  when  following  footings  from  page  to  page, 
to  see  that  they  are  properly  carried  forward,  both  as  to  the 
amounts  and  as  to  their  location  in  columns. 

Verify  all  footings  in  all  books  of  original  entry. 

All  books  of  original  entry  except  the  cash  book  should  be 
checked  into  the  general  ledger  and  the  Controlling  Account, 
but  the  cash  items  should  be  checked  from  all  ledgers  into  the 
cash  book. 

Re-foot  all  personal  ledger  accounts  from  the  point  where 
last  ruled  up. 

Prove  all  footings  of  all  general  ledger  accounts,  balanced 
or  unbalanced,  during  the  entire  period  under  audit. 

Inspect  the  general  ledger  to  see  that  every  item  therein  has 
received  your  check-mark. 

In  case  you  find  errors  on  the  books  of  account,  make  mem- 
oranda of  the  same  upon  your  note-book,  but  do  not  make  cor- 
recting entries  upon  the  books  unless  you  are  authorized  to 
do  so. 

A  general  principle  to  be  observed  in  auditing  is  to  guard 
against  improper  or  fictitious  credits  in  any  account  to  which 
cash  is  posted  on  either  side. 

Vouchers. 

A  great  many  business  concerns  use  a  uniform  voucher  for 
disbursing  cash,  the  same  being  approved  and  certified  as  cor- 
rect by  certain  officials  and  authorized  employes.  While  this  is 

8 


convenient  and  desirable,  it  should  be  understood  that  an  in- 
voice itself,  if  properly  made  out  to  your  client  and  duly  ap- 
proved, is  equally  competent  as  a  voucher.  Therefore,  wherever 
this  manual  calls  for  vouchers  cither  in  support  of  cash  pay- 
ments or  for  journal  entries,  any  memorandum  which  will  estab- 
lish the  validity  of  the  transaction  should  be  accepted  as  satis- 
factory. Your  report,  however,  should  suggest  the  introduction 
of  regulation  vouchers,  if  considered  desirable. 


Analysis  of  Accounts. 

For  the  purpose  of  analyzing  the  various  expense  accounts 
and  capital  accounts,  use  paper  ruled  with  three-column  per- 
pendicular divisions,  the  respective  columns  of  which  are  to  be 
allotted  to  book  reference,  debits,  and  credits.  At  the  top  of 
the  sheet  write  the  caption  of  the  account  under  analysis,  and 
sub-head  the  classification  columns ;  then  from  the  books  of 
original  entry  post  the  items  into  the  proper  columns  of  this 
analysis  sheet ;  when  completed,  the  net  balance  of  all  the  col- 
umns combined  should  equal  the  amount  of  the  account  as 
shown  in  the  ledger.  This  analysis  may  be  made  at  the  time  of 
checking  the  invoices  against  the  particular  items  in  the  books, 
or  it  may  be  made  a  detail  by  itself ;  the  former  is  the  preferred 
method  when  you  have  an  assistant.  Some  auditors  advocate 
the  above  method  of  checking  all  the  general  ledger  accounts, 
but  that  is  not  necessary,  inasmuch  as  the  items  in  the  general 
ledger  accounts,  including  expense  and  capital  accounts,  should 
all  be  checked  against  the  books  of  original  entry,  and  this 
would  consequently  be  mere  duplication  of  work.  This  analy- 
sis, it  should  be  understood,  is  chiefly  for  purposes  of  compari- 
son ;  the  audit  proper  is  accomplished  on  these  accounts,  as 
well  as  on  the  others,  by  first  verifying  the  correctness  of  the 
items  in  the  books  of  original  entry  and  then  checking  them  into 
the  ledger. 

e 


The  Controlling  Account. 

The  purpose  of  the  Controlling  Account  is  to  prove  up  the 
personal  accounts  by  totals  instead  of  checking  them  by  indi- 
vidual items.  (Where  it  is  practicable,  there  should  be  a  sep- 
arate Controlling  Account  for  the  personal  accounts  receivable, 
and  another  for  the  personal  accounts  payable ;  but  where  the 
books  are  not  so  arranged  as  to  make  this  expedient,  it  will  be  sat- 
isfactory to  make  one  account  answer  for  both.)  Begin  with  the 
totals  of  the  personal  accounts  as  shown  on  the  trial  balance  of  the 
initial  date,  then  post  to  the  respective  sides  of  the  account  the 
monthly  footings,  during  the  period  under  audit,  of  such  books 
and  columns  as  are  posted  exclusively  to  personal  accounts. 
Should  there  be  any  book  in  use,  however,  that  is  not  columnized 
in  such  a  manner  as  to  keep  the  personal  account  items  separate 
from  those  relating  to  general  ledger  accounts,  the  personal 
account  items  from  that  particular  book  must  be  posted  indi- 
vidually to  the  Controlling  Account.  After  all  postings  have 
been  made  in  this  manner,  the  net  balance  of  the  Controlling 
Account  should  be  in  exact  agreement  with  the  total  of  this 
class  of  accounts  as  shown  in  the  trial  balance  of  the  terminat- 
ing date.  If  found  so,  it  establishes  the  aggregate  accuracy  of 
the  personal  accounts.  Now,  to  prove  their  individual  accuracy, 
take  off  statements  of  every  open  account  embraced  within  this 
general  summary,  and  mail  them  yourself  to  the  various  debtors. 
with  the  request  that  they  check  them  over  and  return  them  to 
you,  either  endorsed  "Correct,''  or  with  notation  of  any  differ- 
ences. To  make  these  statements  effective  they  should  be  an 
exact  transcript  of  the  face  of  the  ledger,  particularly  so  far 
as  relates  to  credits  to  customers,  and  the  various  classes  of 
credits  should  be  designated  exactly  as  they  are  entered  upon 
the  ledger;  i.  e.,  cash  should  be  designated  "Cash"  and  other 
credits  by  the  -name  credited  upon  the  ledger.  This  form  of 
making  up  the  statements  will  not  only  serve  to  prove  the  cor- 
rectness of  the  amount  of  the  account,  but  will  establish  quite 

10 


effectively  the  truth  of  the  component  parts.  In  fact,  this  is 
the  proper  method  for  determining  whether  all  receipts  from 
customers  have  been  entered  upon  the  cash  book,  provided  it  is 
followed  in  conjunction  with  the  customary  precautions  against 
allowing  improper  credits  in  this  class  of  accounts. 

When  the  statements  sent  out  to  customers  for  comparison 
are  returned  to  you,  there  will  probably  be  exceptions  noted  on 
some  of  them,  but  your  judgment  will  guide  you  as  to  whether 
they  are  of  a  character  to  require  further  investigation  or  not. 
Among  a  large  number  of  accounts  an  occasional  difference  may 
exist  without  impropriety,  though  it  should,  of  course,  be  sus- 
ceptible tof  explanation. 

On  books  of  account  where  the  sales  accounts  and  purchase 
accounts  are  not  kept  separately,  it  is  sufficient  for  practical 
purposes  to  treat  the  total  personal  account  debits  as  accounts 
receivable,  and  the  total  credits  of  the  same  class  as  accounts 
payable.  The  technical  distinction  need  not  be  drawn  except  in 
case  of  liquidation,  when  it  may  become  necessary  to  make  pre- 
cise separation. 


11 


Order  of   Procedure. 

The  following  order  of  procedure  for  making  an  ordinary 
commercial  audit  will  economize  time  and  accomplish  the  best 
results;  but,  when  conditions  may  make  it  impracticable  to  fol- 
low these  directions  exactly,  you  must  accommodate  yourself  to 
circumstances. 

It  will  be  observed  that  this  outline  of  an  audit  is  classified 
to  accord  with  the  basic  books  which  make  up  a  typical  set  of 
books  of  account.  There  are  establishments,  however,  whcrj 
some  of  these  principal  books  radiate  into  special  or  auxiliary 
books ;  in  such  cases  the  same  methods  of  auditing  will  apply 
to  the  auxiliary  books  as  would  be  employed  on  the  particular 
class  of  items  contained  in  them,  were  those  items  entered  upon 
the  main  books  of  account. 


The  Cash  Balance. 

Where  the  engagement  to  make  the  audit  is  entered  into 
some  time  in  advance  of  the  terminating  date,  it  is  altogether 
the  best  plan  to  deposit  in  bank  all  funds  on  hand  at  the  close 
of  the  last  day,  in  order  that  the  bank  account  shall  constitute 
the  entire  cash  balance  of  that  date.  The  bank  pass-book  should 

13 


then  be  written  up,  and  reconciled  immediately  with  your  cli- 
ent's books. 

If  the  above  method  is  not  deemed  feasible,  however,  the  next 
best  plan  is  for  the  auditor  himself  to  balance  the  cash  on  the 
night  of  the  terminating  date,  and  at  that  time  to  assure  him- 
self that  the  proper  amount  in  some  form  or  other  is  at  hand  to 
substantiate  the  book  balance.  As  a  part  of  this  method,  he 
should  get  the  bank  pass-book  written  up  not  later  than  the  day 
following,  and  should  make  reconciliation  with  the  bank  imme- 
diately on  the  return  of  the  pass-book. 

If  you  begin  the  audit  some  time  after  the  terminating  date, 
without  having  previously  balanced  the  cash,  as  directed  here- 
tofore, the  proper  course  is  to  balance  when  entering  upon  your 
work. 

First,  count  the  actual  currency  on  hand  and  list  same,  then 
add  any  memoranda  that  may  be  carried  as  currency.  Inquire 
into  the  authority  for  all  advances  represented  by  these  mem- 
oranda. (By  thus  listing  the  currency  in  advance  of  balancing 
the  bank  account,  you  will  avoid  the  risk  of  currency  having  been 
replenished  through  a  check  not  recorded.) 

Second,  list  checks  on  hand,  after  having  assured  yourself 
that  they  are  entered  upon  the  cash  book  prior  to  the  point  where 
balanced. 

Add  to  the  above  items  the  balance  in  bank,  as  shown  by 
check  book  or  wherever  recorded. 

The  sum  of  the  foregoing  three  items  should  equal  the  cash 
balance,  of  which  a  summary  should  be  incorporated  in  your 
report. 

To  arrive  at  the  cash  book  balance,  you  should  verify  careful- 
ly the  footings  of  that  book  from  the  terminating  date  to  the 
present,  confirming  the  final  footings  in  red  ink,  and  with  your 
check-mark.  Compare  the  result  with  your  summary  of  actual 
cash,  previously  made. 

The  disbursement  side  of  this  intervening  period  should  be 
audited  later  in  precisely  the  same  manner  as  you  test  the  space 

14 


under  direct  review,  namely,  with  returned  bank  checks ;  and 
where  the  distribution  is  made  direct  upon  the  face  of  the  cash 
book,  with  vouchers  or  other  competent  memoranda. 

As  the  receipts  side  for  this  additional  period  is  not  held 
in  check  by  the  Controlling  Account,  it  is  necessary  that  you 
apply  special  methods  to  its  test  when  making  the  audit. 

After  seeing  to  it  that  all  cash  sales  have  been  entered  up  to 
date  for  this  extra  period,  it  is  best  to  prove  the  face  of  the 
book  by  the  inverse  process  of  checking  into  the  cash  book  by 
individual  items  the  deposits  made  in  bank  during  this  time; 
and  in  similar  manner  follow  into  the  book  from  their  lodgment 
such  other  items  as  should  appear  upon  the  receipts  side  of  the 
cash  book ;  namely,  cheeks  on  hand  and  currency  disbursed  or 
remaining  on  hand. 

Sometimes  you  may  meet  with  the  condition  that  the  cash 
balance  of  a  certain  date  is  not  recorded.  To  determine  what 
it  was  at  that  time,  add  to  the  present  balance  the  total  dis- 
bursements made  since  the  date  in  question,  and  deduct  the  to- 
tal receipts  during  the  interval — the  net  difference  is  the  bal- 
ance sought. 


The  Bank  Balance. 

As  soon  as  possible  after  balancing  the  cash  you  should  get 
the  bank  pass-book  written  up,  and  when  returned  to  you  recon- 
cile it  with  your  client's  account  by  deducting  outstanding 
checks  from  balance  shown  by  bank  statement.  The  best  way 
to  accomplish  this  is  to  arrange  the  returned  bank  checks  in 
numerical  order,  and  then  from  the  missing  numbers  construct 
the  schedule  of  uncleared  checks.  Also  see  whether  the  re- 
turned checks  are  properly  endorsed  and  stamped  as  having 
been  paid  through  the  bank. 


15 


Trial  Balances. 

If  trial  balances  of  the  initial  date  and  of  the  terminating 
date  are  at  hand,  you  can  make  use  of  them  for  present  pur- 
poses as  you  find  them ;  but,  where  none  is  on  file,  it  will  be 
necessary  to  take  off  balances  at  both  dates  limiting  the  period 
under  audit. 

For  the  purpose  of  verifying  the  personal  accounts  receiv- 
able, as  described  under  Controlling  Account,  mail  statements 
of  their  accounts  to  all  debtors  shown  upon  the  trial  balance 
of  the  terminating  date. 

Dispatching  these  statements  at  this  time  will  give  opportu- 
nity for  their  return  during  the  progress  of  the  audit. 

As  rapidly  as  these  statements  are  returned  they  should  be 
checked  against  the  trial  balance ;  delinquents  should  be  urged 
to  return  them  until  the  last  one  possible  is  received. 

To  verify  accounts  payable,  the  proper  course  is  to  procure 
statements  from  all  parties  with  whom  your  client  is  known  to 
do  business,  and  compare  them  with  the  accounts  upon  the 
books. 

From  the  trial  balance  of  the  initial  date  determine  the  aggre- 
gate amount  of  personal  accounts  of  that  time,  and  with  that 
amount  as  a  basis  open  the  Controlling  Account,  which  is  to  be 
continued  as  described  under  that  heading  in  General  Notes. 

From  now  on  you  should  audit  the  individual  books  in  the 
following  order,  and  make  it  a  point  t^  complete  at  one  time 
every  feature  of  the  audit  relating  to  each  particular  book,  in- 
cluding verification  of  footings. "  If  possible,  do  not  allow  any 
book  to  pass  out  of  your  possession  while  it  is  under  inspection. 


16 


The  Cash  Book. 

Receipts  Side. 

Verify  footings  for  entire  period  under  audit. 

Check  cash  book  balance  of  the  initial  date  against  cash  bal- 
ance in  ledger. 

Check  cash  sales  from  place  of  record  into  cash  book. 

Several  satisfactory  methods  for  recording  cash  sales  may  be 
mentioned,  such  as  modern  cash  registers  (the  inside  record  of 
which  should  be  under  the  auditor's  exclusive  control),  or  dupli- 
cate cash  sales  tickets,  numbered  consecutively,  any  missing  num- 
bers of  which  are  to  be  accounted  for  to  the  auditor.  When 
other  methods  are  used,  you  should  test  their  efficiency  and.  if 
deemed  unsatisfactory,  recommend  improvements. 

If  there  are  any  other  cash  receipts  of  an  impersonal  charac- 
ter, similar  to  cash  sales  but  differing  in  some  respect  so  that 
they  cannot  logically  be  included  with  them,  such  as  sale  of  old 
material,  etc.,  they  should  be  tested  with  such  records  of  the 
transactions  as  may  be  obtainable. 

Cash  discounts,  if  entered  upon  the  cash  book,  and  not  other- 
wise verifiable,  should  be  scrutinized  to  see  that  they  are  not  ex- 
cessive. An  occasional  item  at  different  periods  of  the  time 
under  audit  should  be  compared  with  remittance  letters  to  estab- 
lish their  individual  correctness,  and  thereby  imply  the  general 
correctness  of  this  class  of  items. 

Where  miscellaneous  credits  r*  »"acle  upon  the  cash  book 
to  customers,  for  such  items  as  .a.  owances,  freights,  etc.,  if 
made  separately  they  should  1  subjected  to  the  same  scrutiny 
as  they  would  receive  were  they  entered  upon  the  journals,  where 
they  properly  belong.  Should  they  be  included,  however,  in  the 
same  item  with  the  cash,  they  should  be  put  to  the  most  rigid 
test.  You  should  procure  copies  from  the  bank  of  the  deposits 
made  for  your  client  during  the  period  under  audit,  and  from 
them  determine  the  actual  cash  portion  of  .these  sundry  credits. 
Of  currency  payments  the  amount  would  have  to  be  determined 

17 


by  deducting  the  offsetting  charge  from  the  total  credit.  Fortu- 
nately this  is  a  condition  not  frequently  met,  and  when  encoun- 
tered should  be  condemned. 

Compare  the  deposits  made  during  the  last  ten  days  preced- 
ing the  terminating  date  with  the  entries  in  the  cash  book. 

From  the  general  ledger  check  all  cash  credits  into  the  cash 
book,  including  columnar  footings ;  and  then  make*  sure  that  all 
of  this  class  of  items  have  been  checked  on  the  receipts  side  of 
the  cash  book. 

Post  monthly  footings  of  personal  accounts  column  to  Con- 
trolling Account. 

The  Cash  Book. 

Disbursement  Side. 

Verify  footings  for  entire  period  under  audit. 

Check  returned  bank  checks  against  items  on  this  side  of  cash 
book,  noting  at  the  same  time  whether  they  are  entered  as  drawn 
in  respect  to  name  of  payee  and  amount.  Stamp  checks  "Aud- 
ited." 

Check  list  of  outstanding  checks  from  bank  reconcile- 
ment against  items  on  cash  book  representing  them,  and  prove 
with  vouchers,  where  such  have  been  returned,  otherwise  with 
invoices.  If  any  of  these  items  represent  purchases  of  securi- 
ties, the  same  should  be  inspected;  if  charged  to  personal  ac- 
counts as  loans  or  advances,  investigate. 

There  should  be  vouchers  ready  at  hand  in  support  of  all 
currency  disbursements,  since  no  cash  should  have  been  paid  out 
in  this  form  without  taking  a  receipt  at  first  hand.  With  these 
vouchers  verify  all  items  of  this  character. 

The  foregoing  should  clear  this  side  of  the  cash  book,  except- 
ing possibly  the  petty  expenditure  voucher,  pay-rolls,  and  notes 
taken  up  at  banks,  or  interest  on  same.  These  items  are  fre- 
quently paid  without  drawing  individual  checks  for  them;  in 
such  cases  the  original  papers  must  be  taken  as  evidence. 

18 


It  should  be  recommended,  however,  that  specific  checks  be 
drawn  in  the  future  for  all  classes  of  disbursements.  The  proper 
way  to  do  this  in  regard  to  petty  expenditures,  is  to  draw  a  check 
in  favor  of  the  disbursing  official  for  a  round  sum  as  a  begin- 
ning, and  thereafter  reimburse  him  by  check  periodically  for  the 
amount  of  his  expenditure  voucher.  This  will  leave  the  original 
amount  in  his  possession,  while  at  the  same  time  covering  his 
expenditures  by  check. 

This  brings  you  to  the  cash  balance,  which  has  been  proven 
up  before. 

You  have  now  established  the  fact  of  the  disbursements  re- 
corded  upon  the  cash  book,  but  it  remains  to  determine  the  pur- 
poses for  which  they  were  made. 

Where  the  charges  for  moneys  paid  out  are  made  upon  the 
cash  book  direct  to  the  various  accounts,  you  should  require 
vouchers  with  invoices  attached,  in  order  to  check  all  items  en- 
tered against  impersonal  accounts,  and  these  vouchers  should  be 
certified  "Correct"  by  some  competent  authority.  Otherwise 
you  should  examine  the  invoices  to  see  that  they  are  of  a  date 
harmonizing  with  the  time  of  payment,  that  they  are  properly 
made  out  to  your  client  and  that  the  amounts  are  correct;  or  at 
least  that  they  have  been  so  attested  by  some  authorized  person. 
Charges  to  personal  accorrts  should  likewise  be  checked  with 
vouchers  which  satisfactorily  explain  the  purpose  of  the  pay- 
ments. 

Pay-rolls  charged  up  should  bear  the  O.  K.  of  some  one  in 
authority,  as  well  as  the  signatures  of  the  employes  to  whom 
paid.  If  not  so  attested,  satisfy  yourself  as  to  their  general  cor- 
rectness, and  recommend  this  safeguard.  If  footings  are  not 
certified,  they  should  be  verified  by  the  auditor. 

Charges  to  Bills  Payable  account  for  notes  taken  up  at  the 
bank  or  elsewhere  should  be  substantiated  by  the  canceled  note 
itself  in  each  instance,  which  should  be  examined  as  to  date  and 
genuineness ;  instances  are  known  where  the  same  note  has  been 
charged  up  more  than  once. 

19 


Petty  Cash  disbursements  should  be  combined  in  one  monthly 
voucher,  properly  attested  O.  K.  by  some  responsible  official.  If 
you  are  asked  to  accept  the  face  of  a  petty  cash  book  as  a  voucher 
for  this  class  of  disbursements,  you  should  require  an  authorized 
O.  K.  to  be  placed  upon  the  book. 

Stamp  all  of  the  foregoing  vouchers  "Audited"  when  taken 
into  account. 

Review  the  cash  book  to  assure  yourself  that  you  had  vouch- 
ers for  all  disbursements. 

Having  thus  satisfied  yourself  that  the  money  was  paid  out 
as  recorded,  and  also  that  it  was  disbursed  for  proper  purposes,  it 
remains  only  to  make  comparisons  with  the  ledgers. 

From  the  general  ledger  check  all  items  posted  from  this  side 
of  the  cash  book,  including  cash  balance  and  monthly  footings 
of  columnar  postings ;  then  make  sure  that  this  has  checked  all 
charges  except  debits  to  personal  accounts. 

Post  monthly  footings  of  personal  accounts  columns  to  Con- 
trolling Account. 

Analyze  items  entered  in  columns  which  are  charged  in  total 
to  the  respective  accounts.  This  is  particularly  important  in  con- 
nection with  the  cash  book,  as  it  will  betray  improper  distribu- 
tion, if  made  accidentally  or  otherwise. 

In  establishments  where  the  Voucher  System  is  a  part  of  the 
scheme  of  accounting,  the  distribution  of  disbursements  is  made 
in  advance  upon  the  Voucher  Register  at  the  time  when  the 
vouchers  are  issued,  instead  of  being  made  upon  the  cash  book 
when  they  are  paid,  as  heretofore  described.  Under  this  ar- 
rangement all  disbursements  are  charged  to  Accounts  Payable 
upon  the  cash  book,  as  an  offset  to  the  corresponding  credits  pre- 
viously made  to  the  same  account  upon  the  Voucher  Register. 

In  such  a  case  the  audit  of  the  disbursement  side  of  the  cash 
book  has  been  completed  practically  at  the  point  where  it  is  indi- 
cated that  the  fact  of  the  disbursements  has  been  established. 
The  following  details,  however,  should  be  added : 

Check  items  in  Accounts  Payable  column  of  cash  book  against 

20 


the  corresponding  column  of  Voucher  Register,  in  order  to  deter- 
mine by  the  amounts  remaining  unchecked  and,  therefore,  un- 
paid, the  correctness  of  the  balance  of  the  Accounts  Payable  ac- 
count. 

Check  monthly  footings  of  Accounts  Taxable  column,  as  well 
as  final  cash  balance,  into  general  ledger. 

If  there  are  any  miscellaneous  charges  in  the  cash  book, 
check  them  in  the  same  manner  as  described  heretofore. 


The  Voucher  Register. 

Crediting  Side. 

Verify  footings  for  entire  period  under  audit. 

Having  previously  checked  paid  vouchers  from  cash  book 
against  Accounts  Payable  column  in  Voucher  Register,  list  un- 
paid vouchers  and  verify  with  balance  on  ledger  representing 
them. 

Check  returned  vouchers  against  paid  items  on  this  side  of 
Voucher  Register  to  determine  missing  vouchers,  and  follow  di- 
rections given  for  incidental  comparison  with  debit  side  of  Vouch- 
er Register. 

Check  total  of  Accounts  Payable  column  to  its  proper  ac- 
count on  ledger. 

Check  other  general  ledger  items  (if  any)  into  ledger. 

Post  footings  of  personal  ledger  column  (if  any)  to  Con- 
trolling Account. 


The  Voucher  Register. 

Debiting  Side. 

Verify  footings  for  entire  period  under  audit. 
Incidentally  with  checking  the  returned  vouchers  against  the 
crediting  side  of  the  Voucher  Register,  examine  them  to  deter- 

21 


mine  that  they  are  properly  O.  K.'d,  and  that  they  have  invoices 
attached  or  on  file  to  substantiate  the  charges  made  from  them 
upon  this  side  of  the  Voucher  Register,  noting  particularly 
whether  the  charges  are  properly  distributed.  Vouchers  issued, 
but  remaining  unpaid,  should  be  compared  similarly  with  the 
items  which  they  represent. 

This  should  clear  the  debiting  side  of  the  Voucher  Register, 
except  such  items  as  are  covered  by  vouchers  paid  but  not  re- 
turned ;  for  such  items  the  returned  bank  check  is  usually  deemed 
a  satisfactory  voucher,  unless  the  nature  of  the  distribution 
should  seem  to  require  corroboration. 

Make  a  list  of  these  missing  vouchers  for  your  report. 

Stamp  vouchers  and  attached  invoices  "Audited"  as  fast  as 
they  are  compared  with  the  entries  upon  the  Voucher  Register. 

Check  general  ledger  items  and  columnar  footings  into  gen- 
eral ledger. 

Post  footings  of  personal  ledger  column  to  Controlling  Ac- 
count. 

Analyze  columns  which  are  posted  in  total  to  any  expense  or 
capital  account. 


The  Purchase  Book. 

• 

The  distinctive  Purchase  Book  is  often  dispensed  with  en- 
tirely where  a  Voucher  Register  is  used,  all  purchases  being 
vouchered  at  first  hand.  In  other  establishments,  however,  the 
Purchase  Book  is  used  for  the  exclusive  purpose  of  recording 
purchases  of  the  commodities  dealt  in,  and  there  may  be  still 
other  conditions  found  that  will  further  modify  this  arrange- 
ment ;  but  the  principle  of  auditing  the  purchases  of  the  stock-in- 
trade,  wherever  recorded,  remains  the  same. 
Verify  footings  for  entire  period  under  audit. 

Check  all  purchases  with  original  invoices,  which  should  be 
examined  in  regard  to  details  of  date,  both  month  and  year;  see 
that  they  are  properly  made  out  to  your  client ;  and  that  they  are 

22 


certified  by  the  manager  or  an  authorized  employe  in  respect  to 
receipt  of  goods,  and  correctness  of  price  and  extensions. 

Stamp  invoices  "Audited"  when  compared  with  entries. 

Purchases  made  for  officials  or  employes  should  be  traced  to 
their  respective  accounts. 

If  the  charges  for  goods  returned  to  shippers  are  entered 
upon  this  book,  check  the  shipping  clerk's  record  of  same  against 
the  entries. 

Check  footings  into  proper  ledger  account. 

Post  footings  to  Controlling  Account. 


The  Sales  Book. 

Verify  footings  for  entire  period  under  audit. 

For  an  audit  of  the  character  described  here  you  may  accept 
the  total-extension  of  individual  invoices  as  the  basis  from  which 
to  take  sales  into  account,  the  assumption  being  that  they  were 
properly  checked  before  they  were  entered  in  the  books. 

Where  there  are  numerous  sales  books  in  use,  it  may  be  found 
that  the  sales  are  transferred  to  a  sales  journal  from  which  the 
postings  are  made  to  the  ledger.  In  such  a  case  it  is  optional 
whether  you  check  the  sales  into  the  journal,  or  post  the  totals 
direct  from  the  book  of  the  original  entry  into  the  Controlling 
Account ;  the  last  named  is  the  more  desirable  method,  where 
practicable,  as  thereby  you  will  be  taking  original  figures. 

Should  credits  for  merchandise  returned  be  entered  in  this 
book,  call  for  authorized  credit  slips,  or  similar  vouchers,  with 
which  to  check  the  entries. 

Stamp  credit  slips  "Audited"  when  compared  with  entries. 

Check  footings  into  general  ledger. 

Post  footings  to  Controlling  Account. 


23 


The  Journal. 

Verify  footings  for  entire  period  under  audit. 

In  auditing  the  journal  a  cardinal  rule,  previously  stated,  is 
to  see  that  no  fictitious  credits  are  allowed  to  stand  in  any  account 
to  which  cash  is  posted  on  either  side.  As  nearly  all  falsifications 
are  made  with  the  ultimate  object  of  diverting  cash,  this  single 
rule,  if  followed,  will  in  itself  accomplish  a  large  part  of  the  ob- 
ject of  the  audit. 

This  applies  equally  to  all  books  of  account;  but  it  is  here 
emphasized  for  the  reason  that  the  journal,  with  its  various  auxil- 
iaries, affords  the  best  opportunity  to  falsify,  and  in  consequence 
this  book  is  usually  favored  with  those  entries,  if  any  such  are 
made. 

The  larger  establishments  use  journal  vouchers  from  which 
entries  are  made  upon  the  journal.  By  this  system  an  individual 
voucher  for  each  entry  is  drawn,  which  recites  the  details  of  the 
transaction  and  is  then  certified  with  an  authorized  O.  K. ;  after 
which  it  is  journalized.  This  facilitates  greatly  the  auditing  of 
the  journal,  as  it  is  then  necessary  only  to  check  these  vouchers 
against  the  entries  in  order  to  establish  their  correctness ;  except 
in  cases  of  extraordinary  entries,  when  independent  investigation 
should  be  made. 

Where  the  journal  entries  are  made  haphazard,  however, 
without  regard  to  any  particular  system — as  is  often  the  case — 
the  inspection  of  the  journal  becomes  a  much  more  complicated 
matter.  To  verify  the  entries  item  by  item  would  involve  an 
amount  of  labor  which  would  make  auditing  entirely  too  expen- 
sive. For  an  audit  such  as  is  here  described  the  necessity  for  de- 
tailed inspection  may  be  overcome  by  having  some  authorized 
official  initial  the  individual  pages  of  the  journal  as  evidence  that 
he  assumes  responsibility  for  the  entries. 

While  accepting  such  a  general  O.  K.  in  the  main,  you  should 
still  verify  entries  so  far  as  possible  with  such  data  or  memo- 
randa as  may  be  at  hand,  noting  particularly  whether  entries  for 

24 


purchases  of  every  kind  are  supported  by  invoices,  and  whether 
the  purchases  were  really  made  for  your  client. 

All  such  invoices  and  memoranda  should  be  stamped  "Aud- 
ited" when  checked  against  entries. 

By  thus  checking  a  portion  of  the  entries,  those  remaining 
unchecked  will  be  brought  more  conspicuously  to  your  notice 
when  reviewing  the  book,  and  any  unusual  or  exceptional  items 
thus  discovered  should  then  be  investigated. 

It  should  be  noted  in  this  connection  that,  where  credits  to 
customers  have  been  made  without  a  definite  O.  K.,  the  receipt 
side  of  the  cash  book  should  be  vouched  by  checking  cash  re- 
ceipts against  the  deposit  slips  of  the  period  under  audit. 

Analyze  columnar  charges  to  expense  or  capital  accounts. 

Check  general  ledger  items,  and  footings  of  columns  posted 
in  totals,  into  general  ledger. 

Post  footings  of  personal  ledger  columns  into  Controlling  Ac- 
count. 


25 


Review     and    Conclusion    of    the 

Audit. 

After  you  have  inspected  all  books  of  original  entry  proceed 
to  examine  the  ledgers. 

Inspect  the  personal  ledger  trial  balance  to  determine  that  all 
debtors'  accounts  have  been  approved  ''Correct/'  or  differences 
reconciled,  through  statements  previously  sent  out ; 

That  all  liabilities,  as  determined  by  statements  requested 
from  trade  creditors,  appear  upon  the  books ; 

That  the  total  of  the  personal  ledger  trial  balance  agrees  with 
the  independent  Controlling  Account  which  you  have  kept 
throughout  the  audit;  and  that  the  Controlling  Account  (if  one 
is  kept)  upon  the  general  ledger,  in  turn,  agrees  with  yours. 

If  some  detail  of  the  instructions  heretofore  given  has  been 
disregarded,  as  is  sometimes  done,  it-  may  result  that  there  is  now 
no  positive  proof  of  the  correctness  of  the  personal  ledger  trial 
balance.  In  such  a  case  it  is  necessary  to  foot  all  open  personal 
accounts  upon  the  ledger  from  the  point  where  they  were  last 
ruled  off,  and  in  that  manner  confirm  the  balances  shown  upon 
the  trial  balance. 

It  will  be  found,  however,  if  the  foregoing  instructions  have 
been  followed  exactly  throughout,  and  if  no  errors  have  been 

27 


found  in  the  books  of  original  entry,  nor  developed  through  the 
medium  of  the  statements  sent  out  or  received,  that  the  personal 
ledger  trial  balance  as  originally  taken  will  stand  confirmed  with- 
out footing  the  accounts. 

The  general  ledger  is  now  to  be  re-footed  for  the  entire  period 
under  audit,  whether  accounts  are  ruled  up  or  remain  open,  and 
note  is  to  be  taken  at  the  same  time  whether  all  items  within  that 
period  bear  your  check  mark.  Following  the  inspection  of  each 
account,  the  net  balance  of  same  is  to  be  checked  against  the 
trial  balance. 

Compare  your  analysis  sheets  of  the  various  expense  and 
capital  accounts  with  the  totals  of  each  of  these  accounts  upon 
the  ledger,  and  make  sure  at  the  same  time  that  no  error  has 
been  made  in  the  distribution  of  charges. 

From  the  trial  balance,  verified  as  above,  draw  up  the  Profit 
and  Loss  Statement  and  the  Balance  Sheet. 


The  Profit  and  Loss  Account. 

Properly  the  Profit  and  Loss  account  should  be  used  merely 
to  receive  the  transfer  of  the  yearly  balances  of  the  various  reve- 
nue accounts,  to  determine  the  result  of  the  year's  business.  If 
the  account  is  restricted  to  the  use  stated  above,  it  follows  that 
the  items  brought  over  have  been  audited  in  their  original  loca- 
tion in  the  revenue  accounts,  and  the  only  precaution  then  neces- 
sary in  respect  to  them  is  to  see  that  they  have  been  transferred 
correctly.  Frequently,  however  charges  and  credits  are  made 
direct  to  the  Profit  and  Loss  account  during  the  year,  and  some- 
times even  direct  upon  the  ledger  without  journalizing.  Such 
entries  should  receive  especial  scrutiny  from  the  auditor,  and 
particularly  if  customers'  accounts  have  been  closed  into  Profit 
and  Loss  for  the  reason  that  they  are  considered  uncollectible. 
It  is  very  important  to  see  that  any  transfer  of  a  personal  ac- 
count which  withdraws  it  from  the  "live"  section  of  the  ledger, 
is  well  authenticated,  whether  it  is  carried  over  into  Profit  and 

28 


Loss,  Bad  Debt,  Suspense,  or  any  equivalent  account.  Inquiry 
should  also  be  made  to  ascertain  whether  such  delinquent  ac- 
counts are  being  properly  followed  up  by  the  collection  depart- 
ment. 


The  Balance  Sheet. 

The  balance  sheet  is  a  condensation  of  the  final  trial  balance, 
and  should  be  in  such  form  as  to  show  in  the  most  compact  man- 
ner, and  with  due  regard  to  proper  relationship,  the  totals  of 
each  of  the  several  classes  of  Assets  'and  Liabilities  of  the  busi- 
ness. 

Where  necessary,  the  balance  sheet  may  be  utilized  for  cor- 
recting any  vital  omission  from  the  books  of  account ;  as,  for  in- 
stance, if  it  is  found  that  no  reserve  has  been  provided  for  bad 
debts,  depreciation,  etc.  This  should  be  rectified  upon  the  bal- 
ance sheet  by  deducting  a  proper  percentage  from  each  class  of 
the  assets  liable  to  depreciation,  such  reductions  to  be  offset  by  a 
corresponding  charge  to  Profit  and  Loss. 

In  a  similar  manner,  when  such  items  as  unearned  premiums 
paid  on  insurance,  interest  accrued  on  loans,  rent  paid  in  ad- 
vance, etc.,  are  of  a  sufficient  amount  to  warrant  it,  credit  may 
be  given  on  the  balance  sheet  by  inserting  a  Special  Inventory 
account,  and  making  a  corresponding  credit  to  Profit  and  Loss. 

In  order  to  be  perfectly  exact,  the  stationery,  fuel,  etc.,  pur- 
chased but  unused  at  the  terminating  date  may  likewise  be  taken 
into  account  in  the  same  manner,  though  the  position  is  usually 
taken  that,  if  they  are  not  of  sufficient  value  to  be  regularly  in- 
ventoried, they  need  not  be  considered. 

WagesSiccrued,  and  interest  on  notes  given,  should  appear 
upon  the  books  of  account ;  but  if  not  entered,  they  must  be  pro- 
vided for  upon  the  balance  sheet  as  "Accrued  Accounts." 

A  great  deal  has  been  written  in  respect  to  the  relative  posi- 
tions which  the  assets  and  liabilities  should  occupy  upon  the  bal- 
ance sheet,  but  the  preferred  arrangement  when  the  double-page 

29 


form  is  used,  is  to  locate  the  assets  upon  the  left-hand  side,  with 
the  liabilities  opposite.  In  harmony  with  this,  when  the  single- 
page  form  is  employed,  the  assets  should  be  placed  before  the 
liabilities. 

The  various  items  of  assets  should  be  arranged  in  the  order 
of  their  availability  in  the  event. of  liquidation,  and  the  liabilities 
should  be  arranged  similarly  in  the  sequence  of  their  respective 
preference  in  law. 

Review  the  balance  sheet  to  determine  how  far  your  investi- 
gation has  established  the  existence  of  the  assets  scheduled,  and 
if  any  items  still  lack  verification,  they  should  now  be  investi- 
gated and  confirmed. 

Satisfy  yourself  that  values  have  not  been  inflated,  and  that 
proper  deductions  have  been  made  from  the  various  items  to 
meet  discounts,  probable  losses  from  bad  debts,  depreciation,  etc. 

The  inventory,  particularly,  should  bear  the  O.  K.  of  some 
one  in  authority,  as  certification  that  the  goods  scheduled  had 
actually  been  purchased  but  remained  unsold  at  the  date  of  the 
inventory,,  and  that  they  were  listed  at  prices  not  exceeding  the 
original  cost.  In  addition  to  this  you  should  satisfy  yourself  of 
the  correctness  of  the  extensions  and  footings. 

Bills  Receivable,  or  other  securities,  should  be  examined,  their 
authenticity  established,  and  they  should  be  checked  against  the 
item  which  they  represent  upon  the  balance  sheet.  To  secure  ab- 
solute confirmation  of  the  genuineness  of  Bills  Receivable  it  may 
be  necessary  to  write  to  the  drawers  of  the  notes,  and  thus  obtain 
direct  acknowledgment. 

If  customers'  notes  have  been  discounted,  but  have  not  ma- 
tured, there  is  a  contingent  liability  involved  for  which  it  is 
necessary  that  a  reserve  be  provided. 

These  instructions  have  advised  the  procuring  of  statements 
from  trade  creditors  for  comparison  with  the  books  of  your 
client.  Of  course  you  should  assure  yourself  that  they  agree, 
and  also  make  a  careful  survey  to  determine  that  all  miscel- 

30 


laneous  liabilities,  such  as  wages,  rent,  etc.,  are  provided  for  upon 
the  balance  sheet. 


The  Auditor's  Report. 

From  the  information  gathered  and  noted  throughout  the 
audit  make  up  your  report,  reciting  conditions  as  you  found 
them.  Call  especial  attention  to  any  irregularities  that  you  may 
have  discovered,  and  recommend  such  changes  or  improvements 
in  the  method  of  accounting  as  you  may  deem  advisable.  Ordi- 
narily the  report  should  contain  the  following  schedules  and  sta- 
tistical statements ;  and,  under  special  conditions,  still  others  may 
be  required  to  meet  the  particular  object  for  which  the  audit 
was  undertaken. 

Balance  Sheet. 

Trading  Statement,  or  Profit  and  Loss  Account,  and  compari- 
sons with  previous  years. 

Summaries  of  the  analyses  of  the  various  Capital  Accounts 
and  Expense  Accounts,  and  comparison  with  previous  year?. 

List  of  Bills  Receivable. 

List  of  other  securities   (if  any). 

List  of  Bills  Payable. 

List  of  Delinquent  Accounts. 

Recapitulation  of  the  cash  balance. 

List  of  outstanding  checks  at  time  of  reconcilement  with 
bank  pass-book. 

List  of  unpaid  vouchers. 

List  of  missing  "paid"  vouchers  (if  any). 

List  of  missing  returned  bank  checks   (if  any). 

Trial  balance  of  the  initial  date. 

Preliminary  trial  balance  of  the  terminating  date. 

Final  trial  balance  of  the  terminating  date. 


31 


The  Auditor's  Certificate. 

The  foot  of  the  Balance  Sheet  should  bear  your  certificate  as 
follows : 

I  hereby  certify  that  I  have  carefully  examined  the  books  of 
account  of  the  Smith-Brown  Co.,  of  Chicago,  111.,  and  that  the 
above  balance  sheet  is  a  true,  correct,  and  full  statement  of  the 
condition  of  their  business  as  on  November  30,  1905,  as  disclosed 
by  said  books  of  account. 


(Signed)- 


Accountant  and  Auditor. 
Dated  at  Chicago,  111.,  December  31,  1905. 


32 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 

AN  INITIAL  FIN¥OF  25  CENT* 

' 


WILL 


so 


DAY  AND  TO  *I.OO  ON 
OVERDUE. 


« 

SEVENTH  DAY 


APR  1  7  1953 

Zj^^J^ni 

'S^Bwaa 


/ecf  to  resell  after  - 


LD21-100m-7,'33 


